(First of all sorry for the late follow up, I got sidetracked with real life)
Also, would you get the home for a cheaper price if you pay cash?
This is the essence of my question.
Scenario 1: pay the house in cashImagine I manage to save, say $400'000 in cash in the next few years. The full price of my house. I could pay it in cash. Once this is done, my yearly expenses would not include paying a mortage. Imagine yearly expenses of $20'000, tax not included. This is what I'd need to take out of my stash each year, + the money for taxes. Imagine a rate of 33% taxes (for the sake of the example), meaning I'd need to withdraw $30'000 every year to pay $10'000 in taxes and $20'000 for my living expenses.
Scenario 2: take a loanAlternatively, I would have to take a loan on the house, I pay a minimal deposit, and imagine I have to pay $20'000 a year on the house for 25 years.
My yearly "regular" expenses are still $20'000 a year, and in my imaginary scenario, I still pay 30% of taxes.
So I need to withdraw from my stach: $20'000 for living expenses + $20'000 for the loan + $20'000 for taxes. Total $60'000
Put it simply, when I withdraw money from the loan, I have to pay not only for the loan, but for the taxes incurred by withdrawing money (capital gain) from my stash.
All of a sudden, taking a loan becomes a terrible idea, right? Because to pay the loan (any loan) you have not only to repay the loan + interest, but also additional taxes.The situation is of course much more complex than what I describe: capital gains are not taxed the same as regular income, and in order to pay for the house in cash it means I need to store that income for several years in a liquid and guaranteed income asset instead of stock, so there's lost opportunity possibly here. Also my stash will be lower and therefore loss of opportunity in the long run.
Summary:which is best, a guy who has 1 million but needs to take $60'000 out of it every year, or a guy who has $600'000 and needs to take $30'000 out of it every year?
More generically, isn't taking a loan a bad idea when your only income is your stash, given that to pay back the loan you have to withdraw and pay additional capital gain tax?